Key takeaways

• SFDR 2.0 proposes replacing the existing Article 8 and Article 9 designations with three voluntary categories: Transition, ESG Basics and Sustainable

• Each of the three main categories would be subject to a minimum 70% investment threshold, alongside category-specific criteria and exclusions

• Parliament supports an opt-out from the categorisation regime for AIFs marketed exclusively to per se MiFID professional investors, subject to certain conditions

• Products outside the new categories could continue to provide certain sustainability information, subject to restrictions, and would remain subject to sustainability risk disclosure requirements similar to the existing Article 6 regime

• The proposal remains subject to the EU legislative process and may change before finalisation, with the new regime expected to apply two years after entry into force

SFDR 2.0 proposes the replacement of the existing disclosure regime with three formal product categorisations or labels (Transition, ESG Basics, and Sustainable). The implementation of SFDR has given rise to significant complexity and compliance costs for financial market participants, while also prompting concerns regarding investor protection, legal certainty and the risk of greenwashing. The proposed reforms are intended to simplify the framework, reduce market confusion, enhance the comparability and clarity of sustainability-related disclosures, and ensure greater alignment with other EU sustainable finance initiatives and disclosure regimes.

On 10 September 2026, the Economic and Monetary Affairs (“ECON”) committee of the European Parliament (the “Parliament”) adopted its report on the SFDR 2.0 reforms (PDF, 374 KB), reaching a broad compromise on the proposed text. The European Parliament plenary formally endorsed this report as its negotiating mandate on 5 October 2026, clearing the way for trilogue negotiations between the Parliament, the Council of the EU (the “Council”) and the Commission to begin.

Parliament’s proposed amendments

The ECON committee position supports the Commission’s proposal to introduce three standard product categories, each of which would be required to disclose the principal adverse impacts of its investments on sustainability factors:

1. Transition (Article 7 of SFDR 2.0)
2. ESG Basics (Article 8 of SFDR 2.0)
3. Sustainable (Article 9 of SFDR 2.0)

The ECON committee proposal retains the ability of Transition-category products to invest in companies that generate revenue from fossil fuels, provided that those companies allocate at least 20% of their total capital expenditure to Taxonomy-aligned activities, make significant investments in environmentally sustainable activities and maintain a measurable, time-bound plan to reduce emissions. The proposal adds a further condition: over a rolling three-year period, such companies must also devote, on average, a greater proportion of their total capital expenditure to Taxonomy-aligned activities than to fossil fuel expansion.

Separately, the proposal preserves the alternative route under which Transition-category products may satisfy the 70% eligible investment threshold by investing at least 15% of their portfolio in EU Taxonomy-aligned activities. For sustainable-category products, however, the proposal increases the corresponding minimum allocation to EU Taxonomy-aligned activities from 15% to 20%.

The ECON committee has also proposed additional disclosure requirements for ESG Basics products. Under the proposal, such products would be required to identify and disclose the principal adverse impacts of their investments on sustainability factors, explain any measures taken to prevent, mitigate or remediate those impacts, and disclose the proportion of their investments in companies active in the fossil fuel sector.

In addition, the proposal narrows the Commission’s original exclusion criteria applicable to the Sustainable, Transition and ESG Basics categories. Whereas the Commission’s text excluded companies from eligibility wherever a benchmark administrator had found any violation of the OECD Guidelines for Multinational Enterprises or the UN Guiding Principles on Business and Human Rights, the ECON committee proposal would apply the exclusion only where the violation constitutes a severe breach of human rights or international humanitarian law that has not been effectively addressed and, where appropriate, remediated.

The ECON committee position also provides for an opt-out from the sustainability product categorisation regime for AIFs marketed exclusively to per se MiFID professional investors, provided that appropriate disclosures are included in the AIF’s pre-contractual documentation. The opt-out would not be available where an AIF is also marketed to elective professional investors or where any retail investor has access to the fund, and does not extend to UCITS funds or other financial products. This approach reflects a policy view that per se professional investors generally possess the expertise, experience and resources necessary to assess sustainability-related product characteristics without relying on the SFDR categorisation framework to the same extent as retail investors. By limiting the opt-out to AIFs marketed exclusively to per se professional investors, the proposal seeks to preserve the investor protection objectives where less sophisticated investor categories may be involved.

Although the Parliament broadly endorses the Commission’s proposed three-category framework, a number of differences between the Parliament’s position and the Council’s negotiating mandate of 24 June 2026 remain to be resolved in trilogue. Key areas of divergence include the minimum EU Taxonomy-alignment threshold for Sustainable products (Parliament: 20%; Council: 15% for both Sustainable and Transition products), the detailed conditions governing fossil fuel exposure within the Transition category, and the treatment of public-sector bonds.

That said, the Parliament’s position has converged with the Council’s on several important issues. Both institutions are now more closely aligned on the length of the implementation period, the availability of an opt-out for AIFs marketed exclusively to professional investors, the grandfathering of existing closed-ended funds, and the introduction of transitional ramp-up periods to allow funds time to meet the 70% eligible investment threshold. This increased alignment should help narrow the range of outstanding issues and facilitate progress in the trilogue negotiations.

Next steps

Following the Parliament’s formal endorsement of the ECON committee report as its negotiating mandate, trilogue discussions with the Council and the Commission can now begin. The first trilogue meeting is expected to take place on 22 October 2026.

Timing and transitional considerations

A further area of uncertainty concerns the transition from the existing SFDR framework to the proposed SFDR 2.0 regime, including how products currently classified and disclosed under Articles 8 and 9 SFDR will transition to the new product categories. At this stage, the legislative proposals do not provide detailed transitional arrangements, and a number of implementation questions remain to be addressed in the final stages of the legislative process.

The Commission originally proposed an 18-month implementation period following the entry into force of the revised regime. However, both the Parliament and the Council have expressed support for a longer period of up to two years, reflecting concerns around operational readiness and the need to sequence the Level 1 legislative framework with the development of related Level 2 regulatory measures.

On current proposals, and assuming political agreement is reached by the end of 2026, market participants should anticipate a transition period of approximately two years before the new requirements become applicable. The revised SFDR framework is therefore expected to apply from late 2028, giving firms additional time to review existing product classifications, assess compliance with the new categorisation regime, and implement any required changes to disclosures, product governance arrangements and marketing materials.

To discuss any aspect of SFDR 2.0 further, please get in touch with your usual Arthur Cox contact.